Here is Buffett’s answer to a question about how to become a value investor.
Buffett: 49 colleges and universities visited Omaha this year. If I ran a business school there would be only 2 courses. How to value a business and How to think about markets. No modern portfolio theory, no beta, etc. You don’t have to be right on 4000 or 400 businesses, not even 40. Circle of competence. Start with a small circle and slowly expand. Don’t spend time on companies that don’t lend themselves to valuation. Accounting is useful, but sometimes it is not meaningful. Durability of competitive advantage is the key. And market fluctuations. The market is there to serve you, not instruct you. If you are an investor and you have a 150 IQ, sell 30 points to somebody else. Being a genius can be a bad thing in this business. You need an inner peace with your decisions, because they will be challenged. I don’t know how much of that is innate and how much is taught, but it is a very good quality to have. Simple but not easy. No higher math. It’s not complicated. But you need an emotional stability. If you have that you’ll do well over time.
Charlie: Half of future investors of the world are going to be in the bottom 50%. Skill does rise to the top in this business. There is so much that is false and nutty in modern finance, banking, academia, economics departments and business schools. Just reduce the nonsense.
Warren to Charlie: Isn’t emotional makeup more important?
Munger: Absolutely. And if you have a 150 IQ and you think it is 160, you are a complete disaster! (Laughter).
Buffett: The best question I have been asked in my meetings with students was: ‘What are we learning that is most wrong?’
Munger: How do you cover that in 1 session?? (Laughs).
Buffett: Efficient market hypothesis, it’s unbelievable that this has taken hold. It’s nutty. (German physicist) Max Planck talked about the resistance of the human mind to new ideas. Science advances one funeral at a time (quoting Max Planck).
Here’s the recap. These things should, in my opinion, be committed to memory:
- Spend your time valuing businesses and thinking about market prices.
- If you don’t understand a company, move on. There is no margin of safety if you don’t know what you’re doing. Would you play a game against someone when you barely knew the rules and they were an expert? How about if you were betting ten or hundreds of thousands of dollars on the outcome? As I believe Buffett said, “If you want to beat Bobby Fischer, play him in anything but chess?”
- If you can’t value a business, move on. Most businesses, most of the time are priced in such a way that there is no glaring discrepancy between price and value. Some have questions about earnings power and assets that you cannot answer. Move on, because there are plenty of fish in the sea and forcing it or falling in love with a mediocre prospect will lead to mediocre returns.
- Focus on finding businesses with a “moat”. If not, a business may be cheap and on its way to getting a whole lot “cheaper”.
- The market is there to serve you, not inform you. Making this payoff requires a great deal of patience and discipline.